FINRA Announces Its Regulatory Priorities for 2015

Posted on February 3rd, 2015 at 10:14 AM

From the Desk of Jim Eccleston at Eccleston Law Offices:

FINRA (the Financial Industry Regulatory Authority) has issued guidance to financial advisors and their firms, stating what it perceives to be the “recurring challenges” and announcing its “Areas of Focus for2015”.  Let’s examine the key points.

            As a preliminary matter, FINRA comments that, over the past decade, it has witnessed “tremendous changes to firms, markets and regulation.”  While many changes have been “positive”, there continue to be challenges.  FINRA focuses on five particular challenges that compromise the quality of services to customers and also that contribute to breakdowns in compliance and supervision.  Those five “recurring challenges” are:

  • Putting Customers Interest First
  • Firm Culture
  • Supervision, Risk Management and Controls
  • Product and Service Offerings,  and
  • Conflicts of Interest 

With those challenges in mind, FINRA announces its regulatory priorities for 2015.

            The first notable category of regulatory priorities relates to products that financial services firms sell to their customers.  FINRA lists several products that are on its radar: 

  • Interest Rate-Sensitive Fixed Income Securities
  • Variable Annuities, Especially High Cost “L” Share Annuities
  • Alternative Mutual Funds
  • Non-Traded REITs (Real Estate Investment Trusts)
  • Exchange-Traded Products (ETPs) Tracking Alternatively Weighted Indices
  • Structured Retail Products (SRPs)
  • Floating Rate Bank Loan Funds, and
  • Securities-Backed Lines of Credit (SBLOCs)

The common regulatory concerns regarding each of the above-listed products include the complexity of the product and the fact that the product may be subject to substantial risk – including market risk, credit risk, liquidity risk, and operational risks.  Likewise, FINRA is concerned that such products formerly were available only to highly sophisticated, institutional investors.  Now that they have gone mainstream, as products sold to retail investors, FINRA states that the products require firms and their advisors “to perform due diligence, make sound suitability decisions and describe product risks in a balanced manner that retail investors can understand.”  

           A second notable category of regulatory priorities relates to what FINRA has termed “Wealth Events.”  FINRA describes the term this way: “Wealth events refer to those situations where an investor faces the decision about what to do with a large amount of money arising from an inheritance, life insurance payout, sale of a business or other major asset, divorce settlement, or an IRA rollover, among other events.”  In that regard, FINRA issues two warnings.  First, firms must ensure that they have supervisory procedures and controls in place, both generally as to suitability and as to disclosure obligations, but also “to help ensure that financial incentives to the [advisor]or the firm do not compromise the objectivity of the suitability reviews.”

            The second warning related to Wealth Events concerns IRA Rollovers.  Specifically, FINRA warns that it would be false and misleading to imply to a customer that his or her only choice or only sound choice is to roll over retirement funds to an IRA sponsored by the advisor’s own firm.  Likewise, firms and advisors cannot claim that its IRAs are “free” or carry “no fee” when the customer will incur costs related to the account, the account investments, or both.

            The third notable category of regulatory priorities relates to private placements.  FINRA continues to be concerned that firms fail to conduct adequate due diligence before recommending the product to investors, and equally troubling, that the private placement recommendations are not suitable for particular investors.  Likewise, FINRA continues to find that offering documents and communications contain misrepresentations, omissions of material fact and inconsistencies with FINRA’s communication rules.

            A final, notable category of regulatory priorities relates to senior investors.  This group, which FINRA defines as aged 65 or older, is growing dramatically and presents significant regulatory issues.  FINRA states, “The consequences of unsuitable investment advice can be particularly severe for this investor group since they rarely can replace investment portfolios with fresh funds and lack time to make up losses.”  In addition to making suitable recommendations, presentations about investments and strategies must be “fair, balanced and not misleading.”  Moreover, FINRA warns that its rules “require reporting or the intervention of court-appointed guardians when elder abuse is detected.”

            As one can see, FINRA has a lot on its plate for 2015!  That’s good news for investors, and for advisors and their firms who meet the challenges that FINRA has outlined.

The attorneys of Eccleston Law Offices represent investors and advisers nationwide in securities and employment matters. Our attorneys draw on a combined experience of nearly 65 years in delivering the highest quality legal services.

Related Attorneys: James J. Eccleston

Tags: Eccleston Law LLC, Eccleston Law Offices, James Eccleston, FINRA

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We just wanted to say thanks for your work in helping us get back some of the money we lost. We are not by any means rich, but we have saved some money and we have done so through a tight-fisted approach to most everything we do. So losing a significant chunk of money hurt…especially at a time when everyone else was growing their accounts. We really appreciate the work you did.

Allan and Adele


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